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The markets loved the November Consumer Price Index (CPI) report coming in better than expectations. In contrast, the Fed is less convinced, and expect to keep rates high for some time. They want more data before being confident they are winning the inflation fight.

Encouraging Numbers

The November CPI report offered encouraging signs that inflation could be easing. Food inflation started to slow and a growing number of categories are declining in price. Housing costs continue to rise, but that is expected to change in the coming months as other series are showing house prices starting to fall.

Market Reaction

The market reaction was clearly positive. On the day of the November CPI announcement the S&P 500 and the Dow saw their best single day gain in percentage terms for over two years. Interest rate futures moved to suggest that the Fed would increase rates 0.5 percentage points at their December meeting. Prior to the CPI numbers, market expectations were balanced between a 0.5 and 0.75 percentage point move.

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A Cautious Fed

However, the Fed has been quick to downplay any expectations that they will soon consider cutting rates. President Logan of the Dallas Fed said on November 10, “This morning’s CPI data were a welcome relief, but there is still a long way to go.” She went on to say that, “Sufficient cooling of the economy will eventually bring inflation back to our target. But this process is just getting started. The labor market remains very tight, and wages continue to grow considerably faster than the rate that would be consistent with 2 percent inflation.” All of this implies that the Fed is less ready than financial markets to read too much into a single encouraging inflation report.

In fact, Fed Governor Christopher Waller said as much in a speech in Australia on November 13, calling the November CPI report “just one data point”, stating that inflation was “enormous” and making it clear that rates are still going up.

Policy Reaction

There is a clear divergence between the reaction of the Fed and the markets to the November inflation report so far.

The Fed may be less inclined to dial back on its inflation fight than the market suspects. Or maybe the markets see more positive data coming that the Fed isn’t willing to speculate on yet.

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